The Trump Effect | Part 1 Business Confidence & Uncertainty in Elections

Business confidence is low. Uncertainty is high. Candidates are spewing whatever words they think will win that one last vote. Challengers have dropped out left and right, leaving us with 3 major contenders.

Make America Great Again. | Hillary for America. | A Future to Believe In.

Now what?

Presidential elections bring all kinds of uncertainty. Voters are choosing from candidates that have opposite policies with little to no middle ground. Businesses aren’t sure what to invest in and when the oil crisis will end. Economists are unsure of where the economy is going.

Uncertainty: state where there is no objective nor are any outcomes or alternatives known.

Talking is one thing, whereas acting could result in something entirely different. If Sanders is preaching for free college, we have to assess how those words are going to work when they are acted upon. Whereas if Trump is pushing for the wall, we have to acknowledge that there is a lot more work that goes into building a wall than words can speak. If Clinton wants to have 33% of all energy sources come from renewable energy by 2020, we have to factor in the feasibility of accomplishing the goal in that time frame.

Talk is just talk. And there’s a lot of talk going on with presidential campaigns! This causes both economists and businesses to be uncertain about what to expect. When you have three strong candidates campaigning in the United States presidential elections, it can be so easy to focus in on the differences (which are many).

Economists Are Stumbling

Economist reckon that because of the vast differences of the candidates, we are about to see the most uncertain election in decades.

If you were to compare Trump and Sanders, it’s rather difficult to draw a direct comparison. Because of their different beliefs, economists have been forced to adjust their economic forecasts. For example, Trump is focusing on enhancing immigration laws whereas Sanders is emphasizing the need to adjust the tax code. Because of these different focuses, economists aren’t sure what to do causing severe uncertainty.

Disclaimer: We acknowledge the possibility that the economy has affected the election process (rather than elections impacting the economy). The issue of elections and business confidence is too complex to make any one assumption.

Stock Market Volatility

As the stock market becomes more volatile, investors become more anxious about making a bad investment and more conscious about making any investments at all. This results in a dip or potentially a collapse in the stock market.

According to Forbes, the Dow Jones Industrial Average is typically higher during the pre-election year out of the 4-year cycle between each election. BUT when a new president is elected, as in the case of 2016, the stock market is at its lowest of the 4 year cycle. Think of Bush in ’89, Bush in ’01, and Obama in ’09.

Value of Currency

The value of currency adjusts as a response to the change in interest rates. Each party (Republican or Democrat) has an influence on the value the US Dollar (USD). Different economic and political policies enacted by the President, among other external economic or international governmental factors, either increase or decrease the value of a dollar.

Over the past 30 years, we’ve seen inflation rates fluctuate so severely due to political elections that entire countries or regions find themselves in economic distress, a debt crisis, restricted resources, and terrible conditions for those living in the countries.

Especially during the months leading up the election and those following after the election, expect changes in value of currency.

Changes in value of currency do occur in other times than change of political command.

Business Confidence

Thomas Costerg, Senior Economist of the Standard Chartered, said that “the issue is that many candidates are ‘talking down’ the economy, affecting confidence.”

The American Institute of CPAs puts out a quarterly report that surveys businesses, CPAs, and the economy. The 2nd Quarter of 2016 Report was released recently and showed surprising results. While this report does not compare the economy/businesses to the election period, AICPA found that optimism improved from 28% to 37% in Q2 and pessimism from 34% to 21%. Inflation is becoming more of a concern now as we progress closer to election day.

Uncertainty

As an entrepreneur, I am part of many business organizations including the Turnaround Management Association. Financial advisors, credit advisors, bankruptcy attorneys, business owners, CFOs, and many others comprise this organization. At a recent meeting, the topic under discussion was how long we can expect the oil crisis to continue. Very quickly, the conversation turned towards the election currently taking place in the United States. The following ideas were raised during this conversation:

The oil crisis all depends on who wins… Who is elected as the president of the United States determines whether the oil crisis will continue beyond 2017 or will taper off mid-2017.

Business aren’t sure what to do right now because that could all change come November 8th.

Everything could change. Nobody really knows what to expect from any of the candidates at this point.

SWOT Analysis

These issues could have severe consequences for some companies. See these as threats. This is why during a SWOT Analysis, you complete a PEST Analysis where the first letter of the acronym is P for political.

Because of this uncertainty, bankers and economists find that companies avoid hiring or investing in large projects during the second half of an election year due to the sheer unpredictability of the situation.

Arleen R. Thomas, CPA, CGMA, American Institute of CPAs (AICPA) senior vice president for management accounting and global markets, concluded after the first quarter poll hosted by the AICPA that “company executives are clearly monitoring the potential business impact of the presidential election. But overall economic conditions and challenges for their particular industries are weighing more heavily in their calculations right now…” Additionally, Thomas claimed that more weight being placed elsewhere is “likely why [they’re] seeing little election-cycle impact on such key categories as hiring or capital spending.”

What does all this mean?

Typically, we find that business owners or financial leaders stick their head in the sand during times of uncertainty. Remove your head from the sand. Know that this is happening. And prepare for anything. It will be okay. This too shall pass.

What can you do now?

First things first… Make sure that before you analyze external factors that could impact your company, you know the basics of your company. More specifically, know your unit economics. This is one simple step that you can do to ensure that you, your management, and your company know where you stand.

If your economics are out of whack, then regardless of who gets elected, your business will suffer. If you’ve checked that your economics are sound and you’re still finding issues, you might have a company that is in trouble. This could be an issue with internal factors.

To help you deal with this uncertainty, we want to give you a free guide, Know Your Economics, that will help you analyze the building blocks of profitability in your company. By knowing your economics, you’ll be better equipped to project the future more accurately and deal with the economic uncertainty to come.

One Response to The Trump Effect | Part 1 Business Confidence & Uncertainty in Elections

We can expect that Trump will reduce regulation, even eliminate it altogether in certain areas of our economy. If he acts as he promises and moves to control immigration, the labor pool for some industries like construction and agriculture will be negatively impacted. Housing may cost more, lettuce may cost more. Agriculture will also see some positive effects of reducing the priorities given smelt or other small fish caught in irrigation pumps in favor of our food supply. If he reins in the Federal Reserve we will have more realistic interest rates. This will help retirees but it will adversely effect business borrowing. He will act to rebuild the military and this will add to the deficit if he is unable to gain the cooperation of the Congress to cut other programs. I don’t expect a lot of support from Congress but he will get some.

From Hillary we can expect more of the same in the sense of regulation that has put a halt to mining and oil exploration/production/transportation since 2009. There will continue to be no enforcement of laws designed to prevent illegal entrance to the country and the agriculture and construction industries will continue to thrive on cheap labor. The Federal Reserve will likely continue to “print money” and the value of the dollar will drop as compared to other world currencies. Seniors will continue to see their retirement savings stagnate but the markets will likely fare well, particularly if the Federal Reserve continues to add to the money supply and continues to drop new money into our financial markets. We can certainly expect the deficit and as a result, the National Debt to increase much as has happened in the prior eight years. Hillary will likely have more support from Congress than either of the other candidates as democrats line up behind her and republicans fear their seats if they do not support some programs.

If Bernie is elected he will continue to over-regulate and although his tax proposals have as much chance of passing as a snowball has in Hell, he will create tremendous uncertainty in the markets as they forecast and fear what he may still be able to accomplish without the help of Congress. We can expect deficits to continue onto the far horizon and the National Debt may once again double or even triple by the impact of his administration.